HOUSING ANALYSIS One of Andrew and Cynthia's goals is to buy a bigger house. Since mortgage rates have fallen significantly, they want to look into purchasing the home earlier than expected. Cynthia will also receive a $18,000 inheritance to contribute towards the down payment and the closing costs of the house. The house they want to buy costs $177,550 and they plan to put 20% down. They have made a few phone calls and found that Guaranty Federal Savings is offering very competitive financing terms. Andrew and Cynthia were offered the following mortgage terms: 1. Compare and evaluate the two mortgage alternatives for Andrew and Cynthia. What would be the front-end costs and the monthly payments for principal and interest on each of these mortgages? How much could the monthly payments for principal and interest go up on the adjustable rate mortgage after the first year? Over the lifetime of the loan? Keeping in mind their financial situation and risk tolerances, which mortgage would you recommend for them? Why? 2. In addition to a 3.25% fixed-rate mortgage with .5 discount point, the lender offers a 3.4% fixed-rate mortgage with 0 discount points. Compare the difference in monthly payments and front-end costs for these two mortgage options (assuming all else remains the same). How many months would Andrew and Cynthia need to keep the 3.25% mortgage in order to offset its higher front-end costs, or "break-even?" Assume they want to keep the home for the rest of their lives. Which of these fixed-rate mortgages would you recommend for the Bates family? Why? 3. Will Andrew and Cynthia be able to qualify for the 3.25% fixed-rate mortgage if the lender applies the following two affordability ratios? o --monthly mortgage payments cannot exceed 28% of the borrower's monthly before-tax income, and - -total installment loan payments cannot exceed 36% of the monthly before-tax income In figuring if they will qualify, use their 2021 income information. (Use their total gross (before-tax) income assume that their incomes increase by 2% ). The amount of the Bates family monthly mortgage payment will be the sum of the following: -Monthly payment for principal and interest 1/12 of his annual property taxes for the new home (expected to be $4,000 a year) 1/12 of his homeowner's insurance premium for the new home (expected to be $2,000 a year) Do not include the maintenance costs. 4. If Andrew and Cynthia do not qualify, is there any way they could reposition their assets and liabilities so that they would pass both qualifying tests? If yes, what could they do? Cash Management TASKS: L Prepare a monthly cash flow statement for 2022 (in a spreadsheet or template from your text) for Andrew and Cynthia using the income and expenditure data from the original case (the house they were looking at was snapped up in a bidding war, and the inheritance was delayed, so they are staying in their current house). For January through July, do not incorporate any of the savings goals you recommended in Part I of the case (as they have not read them yet!) Regarding income, assume that salary will increase 3% over 2021 values. The salary increase will also increase the amount of Social Security taxes withheld by 3%. They also do not expect to sell any investments during 2022. Enter monthly GROSS income and monthly income and social security taxes rather than monthly net income. Divide the house payment into its parts - principal \& interest on (line 23) pronerty taxes (line 41), and homeowner's insurance (line 37) -- as you did in Assignment #1. Assume all other income items remain constant. 1. Assume all expenditures are the same as 2021. a. assume that the Texaco card is paid off in January 2022 b. The mastercard payment remains at $415 per month c. Pay $100 a month on the Dillard's card (note that April may not be $100 ) 2. Beginning in July, begin these additional savings goals. a. - After COVID19 issues and layoffs save no less than 4 months expense by the end of the year. (To have a total of $15,000 accumulated in their money market account in 6 months to be used as their emergency fund. They currently have $5,453 accumulated). (note that they do not begin this until July) (use a monthly interest rate of 1652 (which is 2 percent simple interest compounded monthly) for your payment calculation) b. - - To contribute $5,000 each year to Andrew's 401(k) retirement account. (though he has not begun saving until July, he will fully fund this from July through December. However, in 2022, he will save 1/2 as much each month as he save the full year) c. E-. Each will contribute $6000 to a Roth IRA (note that they do not begin this until July, but they will fully fund this in 2022) d. To save $5,000 for the down payment on a new car in 2 years. (note that they do not begin this until July) (use a monthly interest rate of .1652 (which is 2 percent simple interest compounded monthly) for your monthly payment calculation) II. Prepare an Income and Expense Statement for 2022 (Modify the one from Part I). Include the savings goals listed above as expenses on the worksheet. (you may need to add lines or replace other items in the worksheet). Be sure to label all expense categories that are not already labeled properly. A budget is an estimate of income and expenses, not an accounting of every penny ROUND CATEGORIES UP OR DOWN $1.00 III. Create a NEW Balance Sheet for January 1, 2023.(Modify the one from Part I) a. Be sure to amortize the loans (including the Mastercard account). (Assume that the Jan 1 payments have been made - use the 'ending balance' after the Jan 1 payment was made).(All other expenses will have been paid before the balance sheet is created). b. Incorporate the new savings goals into the balance sheet (be sure to add the new assets) IF there is a cash surplus on the 2022 Income Statement, add it to the checking account balance. (IF there is a shortage, add it to the Visa Card) ANSWER THESE QUESTIONS: 5. How large was Andrew and Cynthia's cash surplus or a cash deficit in 2022? a. correctly calculate the liquidity ratio b. Correctly calculate the solvency ratio c. Correctly calculate the savings ratio d. Correctly calculate the debt service ratio (see page 60 in the text) Compare these to the ratios from the prior assignment. Comment on whether they are improving or falling behind? 6. What impact would the 2022 cash surplus (deficit) have on their January 1,2023 balance sheet? Comment on specifically what improved or was made worse? 7. Will the Bates meet the goals to have a 6 month emergency fund, save for retirement and make progress with their other goals Without increasing their debt? If not, what do you recommend that the Bates consider and prioritize? 8. Discuss the pros and cons of Cynthia staying home with the child (or children) for the next 5 years (instead of working part time for 6 months). Would it make more financial sense for Andrew to stay at home with the children? 9. While the Bates are excited about the new child and the great future that the baby will have, what advice would you offer Andrew and Cynthia about saving for their retirement or the baby's college fund? (Which should be a priority and why?) 10. Looking forward, how much extra would the new/bigger house add to their expenses? From what you see in their 2022 cash budget, is there room for the Bates to have one parent stay home for an extended period of time AND buy the new/bigger house? Do you have any advice IF this were a goal that Cynthia really pushed for? 11 ONE LAST LOOK AHEAD! Create one more Income/expense statement (modify the 2022 one and name it 2023 preview Group number #) Make these changes: a. Assume that the Andrew's incomes stavs the same, but that Cynthia goes 1/2 time for the year (She will actually work full time in January, October through December, and on call from April through September, but earns 1/2 of her 2022 wages). b. Taxes and social security payments will decline to 15000 . c. The baby will add $6000 a year to expenses (prorated for 10 months ( $5000 total) d. Remember that some liabilities will cease in 2022 or 2023 (which ones are paid off??) e. By going part time, Cynthia is able to continue to contribute to her 401K,but will not get the employer's match. f. When Cynthia goes part time her employer will no longer pay her health insurance, so she will be added to Andrew's insurance. The cost of family coverage from Andrew's employer is $275 a month. A. Discuss these issues: (5 points) What is the group's estimate for the Bates' cash surplus or deficit for 2023? What quick changes do you think that they can make if there is a deficit? Can they cover it with the surplus added to their checking account in 2022, or would more cuts need to be made? IF they can pay for the deficit from savings should some cuts still be made do you think? (remember that there are 'feedbacks'... IF you eat out less, wont you eat IN more? Make sure that you make adjustments for such things)? B. What items do you see missing from their current financial plan that will likely need to be addressed before the end of the class? (2 points) HOUSING ANALYSIS One of Andrew and Cynthia's goals is to buy a bigger house. Since mortgage rates have fallen significantly, they want to look into purchasing the home earlier than expected. Cynthia will also receive a $18,000 inheritance to contribute towards the down payment and the closing costs of the house. The house they want to buy costs $177,550 and they plan to put 20% down. They have made a few phone calls and found that Guaranty Federal Savings is offering very competitive financing terms. Andrew and Cynthia were offered the following mortgage terms: 1. Compare and evaluate the two mortgage alternatives for Andrew and Cynthia. What would be the front-end costs and the monthly payments for principal and interest on each of these mortgages? How much could the monthly payments for principal and interest go up on the adjustable rate mortgage after the first year? Over the lifetime of the loan? Keeping in mind their financial situation and risk tolerances, which mortgage would you recommend for them? Why? 2. In addition to a 3.25% fixed-rate mortgage with .5 discount point, the lender offers a 3.4% fixed-rate mortgage with 0 discount points. Compare the difference in monthly payments and front-end costs for these two mortgage options (assuming all else remains the same). How many months would Andrew and Cynthia need to keep the 3.25% mortgage in order to offset its higher front-end costs, or "break-even?" Assume they want to keep the home for the rest of their lives. Which of these fixed-rate mortgages would you recommend for the Bates family? Why? 3. Will Andrew and Cynthia be able to qualify for the 3.25% fixed-rate mortgage if the lender applies the following two affordability ratios? o --monthly mortgage payments cannot exceed 28% of the borrower's monthly before-tax income, and - -total installment loan payments cannot exceed 36% of the monthly before-tax income In figuring if they will qualify, use their 2021 income information. (Use their total gross (before-tax) income assume that their incomes increase by 2% ). The amount of the Bates family monthly mortgage payment will be the sum of the following: -Monthly payment for principal and interest 1/12 of his annual property taxes for the new home (expected to be $4,000 a year) 1/12 of his homeowner's insurance premium for the new home (expected to be $2,000 a year) Do not include the maintenance costs. 4. If Andrew and Cynthia do not qualify, is there any way they could reposition their assets and liabilities so that they would pass both qualifying tests? If yes, what could they do? Cash Management TASKS: L Prepare a monthly cash flow statement for 2022 (in a spreadsheet or template from your text) for Andrew and Cynthia using the income and expenditure data from the original case (the house they were looking at was snapped up in a bidding war, and the inheritance was delayed, so they are staying in their current house). For January through July, do not incorporate any of the savings goals you recommended in Part I of the case (as they have not read them yet!) Regarding income, assume that salary will increase 3% over 2021 values. The salary increase will also increase the amount of Social Security taxes withheld by 3%. They also do not expect to sell any investments during 2022. Enter monthly GROSS income and monthly income and social security taxes rather than monthly net income. Divide the house payment into its parts - principal \& interest on (line 23) pronerty taxes (line 41), and homeowner's insurance (line 37) -- as you did in Assignment #1. Assume all other income items remain constant. 1. Assume all expenditures are the same as 2021. a. assume that the Texaco card is paid off in January 2022 b. The mastercard payment remains at $415 per month c. Pay $100 a month on the Dillard's card (note that April may not be $100 ) 2. Beginning in July, begin these additional savings goals. a. - After COVID19 issues and layoffs save no less than 4 months expense by the end of the year. (To have a total of $15,000 accumulated in their money market account in 6 months to be used as their emergency fund. They currently have $5,453 accumulated). (note that they do not begin this until July) (use a monthly interest rate of 1652 (which is 2 percent simple interest compounded monthly) for your payment calculation) b. - - To contribute $5,000 each year to Andrew's 401(k) retirement account. (though he has not begun saving until July, he will fully fund this from July through December. However, in 2022, he will save 1/2 as much each month as he save the full year) c. E-. Each will contribute $6000 to a Roth IRA (note that they do not begin this until July, but they will fully fund this in 2022) d. To save $5,000 for the down payment on a new car in 2 years. (note that they do not begin this until July) (use a monthly interest rate of .1652 (which is 2 percent simple interest compounded monthly) for your monthly payment calculation) II. Prepare an Income and Expense Statement for 2022 (Modify the one from Part I). Include the savings goals listed above as expenses on the worksheet. (you may need to add lines or replace other items in the worksheet). Be sure to label all expense categories that are not already labeled properly. A budget is an estimate of income and expenses, not an accounting of every penny ROUND CATEGORIES UP OR DOWN $1.00 III. Create a NEW Balance Sheet for January 1, 2023.(Modify the one from Part I) a. Be sure to amortize the loans (including the Mastercard account). (Assume that the Jan 1 payments have been made - use the 'ending balance' after the Jan 1 payment was made).(All other expenses will have been paid before the balance sheet is created). b. Incorporate the new savings goals into the balance sheet (be sure to add the new assets) IF there is a cash surplus on the 2022 Income Statement, add it to the checking account balance. (IF there is a shortage, add it to the Visa Card) ANSWER THESE QUESTIONS: 5. How large was Andrew and Cynthia's cash surplus or a cash deficit in 2022? a. correctly calculate the liquidity ratio b. Correctly calculate the solvency ratio c. Correctly calculate the savings ratio d. Correctly calculate the debt service ratio (see page 60 in the text) Compare these to the ratios from the prior assignment. Comment on whether they are improving or falling behind? 6. What impact would the 2022 cash surplus (deficit) have on their January 1,2023 balance sheet? Comment on specifically what improved or was made worse? 7. Will the Bates meet the goals to have a 6 month emergency fund, save for retirement and make progress with their other goals Without increasing their debt? If not, what do you recommend that the Bates consider and prioritize? 8. Discuss the pros and cons of Cynthia staying home with the child (or children) for the next 5 years (instead of working part time for 6 months). Would it make more financial sense for Andrew to stay at home with the children? 9. While the Bates are excited about the new child and the great future that the baby will have, what advice would you offer Andrew and Cynthia about saving for their retirement or the baby's college fund? (Which should be a priority and why?) 10. Looking forward, how much extra would the new/bigger house add to their expenses? From what you see in their 2022 cash budget, is there room for the Bates to have one parent stay home for an extended period of time AND buy the new/bigger house? Do you have any advice IF this were a goal that Cynthia really pushed for? 11 ONE LAST LOOK AHEAD! Create one more Income/expense statement (modify the 2022 one and name it 2023 preview Group number #) Make these changes: a. Assume that the Andrew's incomes stavs the same, but that Cynthia goes 1/2 time for the year (She will actually work full time in January, October through December, and on call from April through September, but earns 1/2 of her 2022 wages). b. Taxes and social security payments will decline to 15000 . c. The baby will add $6000 a year to expenses (prorated for 10 months ( $5000 total) d. Remember that some liabilities will cease in 2022 or 2023 (which ones are paid off??) e. By going part time, Cynthia is able to continue to contribute to her 401K,but will not get the employer's match. f. When Cynthia goes part time her employer will no longer pay her health insurance, so she will be added to Andrew's insurance. The cost of family coverage from Andrew's employer is $275 a month. A. Discuss these issues: (5 points) What is the group's estimate for the Bates' cash surplus or deficit for 2023? What quick changes do you think that they can make if there is a deficit? Can they cover it with the surplus added to their checking account in 2022, or would more cuts need to be made? IF they can pay for the deficit from savings should some cuts still be made do you think? (remember that there are 'feedbacks'... IF you eat out less, wont you eat IN more? Make sure that you make adjustments for such things)? B. What items do you see missing from their current financial plan that will likely need to be addressed before the end of the class? (2 points)